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San Francisco

It happens all too often, or at least it feels like it does. Your client is named as a defendant in a case that you know has no merit. You tell the plaintiff that they have no case and, after they ignore you, you move to dismiss. But low pleading thresholds, broad allegations and some “questionable” representations from opposing counsel prevent your motion from extricating your client from messy litigation

As a defendant, your client generally has two options: It can either try to settle the case and pay money that it has no obligation to pay or it can fight and pay attorneys’ fees that it shouldn’t have to pay. Your client stands on principle and chooses the latter option. You’re forced to conduct costly discovery and, of course, deal with more "questionable" motions and discovery disputes generated by opposing counsel. Finally, you have the ammo you need and you win your client’s motion for summary judgment.

Everything is good, right? Wrong. More than three years have passed since the complaint was filed and your client has been forced to pay a substantial amount of money in the defense of a case that never should have been filed. What can be done?

Hogan Lovells, working with its client New York Marine, developed a solution that led to the recovery of its coverage litigation expenses.

In Redding v. Anderson ZurMuehlen, P.C., the plaintiff claimed that she had received improper accounting advice from Anderson ZurMuehlen, P.C. (“AZ”), a Montana-based accounting and tax advisory firm, in connection with a tenancy-in-common investment. She alleged $4.6 million in damages. Redding’s counsel later filed similar claims against the same defendant on behalf of several other plaintiffs and sought to settle the cases globally, ignoring the inherent conflict of interest between her various clients she had created.

AZ’s insurer, New York Marine and General Insurance Company (“New York Marine”), agreed to contribute $4 million—the maximum amount it could contribute under the two relevant policies it had issued to AZ—to help fund the settlement of all of the claims against its insured. AZ contributed a smaller portion of the settlement. Redding’s share of the settlement was about $450,000.

Almost immediately after the settlement was executed and funded, Redding and her lawyer filed a third-party bad faith lawsuit against New York Marine (Redding v. ProSight Specialty Management Company), alleging that New York Marine had failed to settle her case prior to the filing of the other plaintiffs’ claims against AZ. Redding claimed that she had made a $2 million demand to settle her own claims, and that New York Marine’s payment of $4 million to settle all of the plaintiffs’ claims against AZ constituted bad faith, an interesting argument for Redding’s lawyer to make, as it was she who had filed the other claims and it was she who had engineered (and profited from) the settlement of those claims for all of the insurance proceeds available to AZ.

New York Marine contested the claims, as it had strictly complied with its duties under Montana law. Numerous discovery disputes ensued as a result of Redding’s counsel improperly shielding evidence that the bad faith claim had been manufactured prior to settlement of the underlying case. Redding’s counsel also filed a number of motions that the Federal Court in Montana later described as “frivolous” – including a motion to disqualify New York Marine’s counsel and a motion to recuse the trial judge, the Honorable Charles C. Lovell of the United States District Court for the District of Montana. In the latter motion, Redding’s counsel went so far as to claim that Judge Lovell inappropriately relied upon his decades of legal experience in ruling against a number of other baseless motions that Redding had filed. Needless to say, these motions were summarily denied.

New York Marine moved to recover its attorneys’ fees incurred in relation to the motion to disqualify counsel and a motion to compel as a sanction for Redding’s counsel’s litigation tactics. The motion was granted and Redding’s counsel (individually, not as a firm) was ordered to pay New York Marine just under $108,000.

New York Marine also moved for summary judgment, arguing that the evidence was undisputed that it had conducted a reasonable investigation of Redding’s claim, that it had a reasonable basis in law and in fact for contesting her claim and the alleged amount of the claim, that it did not leverage an undisputed claim in order to obtain the settlement of disputed claims and that it did not delay in approving or paying the settlement or its payment of the policy limits. Judge Lovell granted the motion on all counts in a 104-page order, noting that the evidence showed that Redding’s counsel had intentionally “set up” a bad faith claim against New York Marine on the basis of claims that were never supported by the “merest scintilla” of evidence and that many of the positions taken by Redding and her counsel were “frivolous,” “misleading,” “mischaracteriz[ations],” nothing more than “straw man” arguments and wholly unsupported by any law or facts.

After securing a defense judgment, New York Marine moved to recover the attorneys’ fees and costs it had incurred over the course of the nearly three-year litigation under 28 U.S.C. § 1927 and the court’s inherent power to impose sanctions where a party (or its counsel) has acted in bad faith or recklessly engaged in conduct tantamount to bad faith. New York Marine stressed that Redding’s counsel knew the case was not viable when it was filed, refused to acknowledge that reality and continued to prosecute Redding’s claims for nearly three years.

Squarely rejecting the argument that Redding’s counsel simply engaged in “zealous advocacy,” Judge Lovell issued a 41-page order detailing all of the misconduct that needlessly multiplied the proceedings. Judge Lovell blasted Redding’s counsel for its conduct over the course of the litigation—and apparent breaches of fiduciary duties—and ultimately ordered Redding’s counsel to pay another $515,119.90 of New York Marine’s attorneys’ fees (in addition to the previous six-figure award of fees and costs stemming from other litigation misconduct).

All told, Redding’s counsel was ordered to repay more than $625,000 of New York Marine’s attorneys’ fees and costs. This case represents one of the largest sanctions against a Montana attorney in recent history. More importantly, this case represents a warning that there may be severe consequences for plaintiffs’ attorneys who file and maintain cases against insurance companies without evidentiary or legal support.

New York Marine was represented by Hogan Lovells’ San Francisco-based partner Mark Goodman and associates Michelle Alborzfar and Brandon Rainey.